Chapter 9 - Nontaxable Exchanges

True or false: An involuntary conversion may result in gain realization when the tax basis of the property exceeds the insurance or condemnation proceeds.

False

True or false: In a like-kind exchange of mortgaged properties, both parties are treated as receiving boot equal to the gross amount of debt relief on the exchange.

False

Jose transferred property with a tax basis of $67,000 and a fair market value of $100,000 exchange for a 25 percent interest in Delta Partnership. How much gain does Jose recognize on the exchange?

$0

Delta Company's factory building was destroyed by an earthquake. Delta received $2 million from its insurance company, realizing a $240,000 gain on the involuntary conversion. Delta spent $1.85 million on a new factory building 6 months after the earthquake. If Delta elects to defer as much gain as possible, what is the tax basis of the replacement building?

$1.76 million

Keith transferred property with a tax basis of $50,000 in exchange for corporate stock with a fair market value of $110,000. Immediately after the transaction, Keith owns 20 percent of the corporation's stock. What is Keith's basis in the stock received in the exchange?

$110,000

William sold stock with a tax basis of $100,000 for $85,000. Ten days later, William repurchased identical shares for $80,000. How much loss does William realize and recognize on the sale of stock?

$15,000 loss realized; $0 loss recognized

Adams Corporation issued its stock with a value of $150,000 in exchange for property. The transferor's tax basis in the contributed property was $65,000. If the transaction did not satisfy the control requirement, what is Adams' tax basis in the property received in the exchange?

$150,000

Delta Company's factory building was destroyed by an earthquake. Delta received $2 million from its insurance company, realizing a $240,000 gain on the involuntary conversion. If Delta spent $1.85 million on a new factory building 6 months after the earthquake, how much of its realized gain must be recognized?

$150,000

In a nontaxable exchange transaction, Beta Company transferred cash of $10,000 and property with an adjusted tax basis of $35,000 in exchange for qualifying property with a value of $50,000. Calculate Beta's basis in the qualifying property received this transaction.

$45,000

In a nontaxable exchange transaction, ABC Company transferred property with an adjusted tax basis of $55,000 in exchange for qualifying property with a value of $50,000 plus $10,000 of cash. Calculate ABC's basis in the qualifying property received this transaction.

$50,000

Keith transferred property with a tax basis of $50,000 in exchange for corporate stock with a fair market value of $110,000. Immediately after the transaction, Keith owns 20 percent of the corporation's stock. How much gain does Keith recognize on the exchange?

$60,000

Adams Corporation issued its stock with a value of $150,000 in a nontaxable exchange for property. The transferor's tax basis in the contributed property was $65,000. What is Adams' tax basis in the property received in the exchange?

$65,000

In a nontaxable exchange transaction, ABC Company transferred $10,000 cash and property with an adjusted tax basis of $55,000 in exchange for qualifying property with a value of $50,000. Calculate ABC's basis in the qualifying property received this transaction.

$65,000

Jose transferred property with a tax basis of $67,000 and a fair market value of $100,000 exchange for a 25 percent interest in Delta Partnership. What is Jose's basis in the partnership interest?

$67,000

Jose transferred property with a tax basis of $67,000 and a fair market value of $100,000 in exchange for a 25 percent interest in Delta Partnership. What is Delta's tax basis in the property acquired from Jose?

$67,000

On May 1, 2021, ABC's warehouse was destroyed in a fire. ABC received a large insurance settlement and realized a gain on the involuntary conversion. ABC is a calendar-year taxpayer. By what date must ABC replace the warehouse in order to defer recognition of the realized gain?

December 31, 2023

Betty sold ABC common stock on June 1, 2021, with a realized loss. Which of the following acquisitions would cause her sale to be considered a wash sale? (Select all that apply.)

- Betty purchased additional ABC common stock on July 1, 2021. - Betty purchased additional ABC common stock on May 20, 2021.

Which of the following are common nontaxable exchange provisions?

- Involuntary conversions - Like-kind exchanges - Wash sales

Which of the following exchanges would be considered like-kind? (Select all that apply.)

- Office building for undeveloped land - Apartment building for retail building - Warehouse for factory

Which of the following are requirements for nontaxable exchange treatment of a transfer of property in exchange for corporate stock? (Select all that apply.)

- Property transferred solely in exchange for stock. - Transferors in control of the corporation immediately after the exchange.

Which of the following transactions is considered a wash sale of securities? (Select all that apply.)

- Sale of stock with a realized loss, followed by a purchase of identical stock 15 days later. - Sale of stock with a realized loss, preceded 10 days earlier by a purchase of identical stock.

As part of a nontaxable exchange, ABC received $15,000 cash and property with a fair market value of $65,000. Which of the following statements regarding the cash receipt is accurate? (Select all that apply.)

- The most gain ABC could be required to recognize on the transaction is $15,000. - The least gain ABC could be required to recognize on the transaction is $0.

Which of the following are requirements to defer recognition of gain on an involuntary conversion?

- The property must be replaced with property similar or related in service or use. - The property must be replaced within the two taxable years following the year of the conversion.

Which of the following dispositions is considered an involuntary conversion? (Select all that apply.)

- Theft of business assets - Destruction of property in a flood - Condemnation of property by the government - Hurricane that destroys a resort hotel - Fire that destroys a factory - Golf course taken by the government to build a road

Which of the following is true of nontaxable exchange transactions?

- They are authorized by a provision of the Internal Revenue Code. - They do not result in the current recognition of some or all of the gain or loss resulting from the transaction.

If a taxpayer experiencing an involuntary conversion does not reinvest 100 percent of the insurance or condemnation proceeds, the ______. (Select all that apply.)

- amount not reinvested is treated as boot - taxpayer must recognize gain equal to the lesser of the gain realized or the proceeds not reinvested

When boot is received in a nontaxable exchange transaction, the basis of the ______. (Select all that apply.)

- boot equals its fair market value - qualifying property acquired is reduced by the basis value of the boot received

The substituted basis rule ______. (Select all that apply.)

- causes unrecognized gain or loss on a nontaxable exchange to be embedded in the basis of qualifying property received - triggers deferred gain or loss from a nontaxable exchange on disposition of the qualifying property received

The inclusion of boot in a nontaxable exchange ______. (Select all that apply.)

- does not trigger recognition of loss - does not trigger recognition of gain in excess of realized gain

A transfer of property in exchange for a partnership interest ______. (Select all that apply.)

- gives the partner a basis in the partnership interest equal to the basis of the property transferred - is a nontaxable exchange for both the partners and the partnership

When ownership of a mortgaged property is transferred as part of a like-kind exchange, the debt relief ___.

- is treated as boot received by the party relieved of liability - is treated as boot paid by the party assuming liability

Qualifying property ______. (Select all that apply.)

- must be both disposed of and received in order for an exchange to be nontaxable - is defined by the requirements of the relevant nontaxable exchange provision

A corporation that issues its own stock in a nontaxable exchange for property ______. (Select all that apply.)

- recognizes no gain or loss on the exchange. - takes a carryover basis in the assets acquired

Adam and Beth exchanged real property in a like-kind exchange. The property surrendered by Adam had a $100,000 mortgage. The property surrendered by Beth had a $130,000 mortgage. How much boot was given by which party in the exchange?

Adam gave $30,000 of boot.

ABC exchanges property with an adjusted basis of $50,000 for qualifying property valued at $75,000 in a nontaxable exchange. Under the substituted basis rule, the tax basis of the qualifying property received is $

Blank 1: 50,000, $50,000, or 50000

Nontaxable exchange treatment applies only to the disposition and receipt of _____ property.

Blank 1: qualifying or qualified

In a nontaxable exchange transaction, gain or loss is _____ but not currently _____.

Blank 1: realized Blank 2: recognized

When property subject to a mortgage is transferred in a like-kind exchange, relief of liability for the debt is treated as cash _____ by the party relieved of liability and cash by _____ the party assuming the liability.

Blank 1: received Blank 2: paid

A typical characteristic of a nontaxable exchange is that the basis of qualifying property received is computed using the _____ basis rule.

Blank 1: substituted

Zeta Company realized, but did not recognize, a $(20,000) loss on the acquisition of land in a nontaxable exchange. As a result of this (favorable or unfavorable?) _____ book/tax difference, Zeta's taxable income will be _____ than its book income.

Blank 1: unfavorable Blank 2: greater, higher, larger, or more

In a nontaxable exchange transaction, Beta Company transferred property with an adjusted tax basis of $35,000 in exchange for qualifying property with a value of $50,000 plus $10,000 of cash. Calculate Beta's gain realized and recognized on this transaction.

Gain realized, $25,000; gain recognized, $10,000

The primary reason the nontaxable exchange provisions for partnership formations are more flexible than those for corporate formations is that ______.

transferors to partnerships do not have to control the entity in order for the exchange to be nontaxable

Jenny owns property with a tax basis of $40,000 and a value of $120,000. Mark owns property with a tax basis of $50,000 and a value of $125,000. If Jenny and Mark wish to exchange assets, how much boot should be given by which party in order for the exchange to be economically rational?

Jenny must give $5,000 of boot to Mark.

In a nontaxable exchange transaction, Beta Company transferred property with an adjusted tax basis of $75,000 in exchange for qualifying property with a value of $50,000 plus $10,000 of cash. Calculate Beta's gain or loss realized and recognized on this transaction.

Loss realized, $(15,000); loss recognized, $0

When boot is paid in a nontaxable exchange transaction, the ______.

value of the boot paid increases the substituted basis of the qualifying property acquired

James Company's office building was destroyed by a tornado. The building was fully insured, and James realized a gain on this involuntary conversion. If James wishes to defer recognition of this gain, which of the following replacement properties is most likely to qualify?

New office building in another town 30 miles away.

Nontaxable exchange treatment for corporate and partnership formations ______.

was enacted by Congress to encourage the formation of new business entities

Which of the following statements regarding the value to taxpayers of qualifying a transaction as a nontaxable exchange is false?

Nontaxable exchange provisions allow taxpayers to defer gain recognition while currently recognizing realized losses.

Which of the following transactions would not qualify for nontaxable exchange treatment?

Performance of services in exchange for 100 percent of the stock of a newly-formed corporation

Which of the following statements regarding nontaxable exchange book/tax differences is false?

The book/tax difference resulting from a nontaxable exchange is permanent in nature.

The control requirement for nontaxability of a transfer of property to a corporation in exchange for corporate stock requires ______.

all transferors in the aggregate to own 80 percent or more of the corporation's outstanding stock immediately after the exchange

The tax basis of property acquired through reinvestment of insurance or condemnation proceeds from an involuntary conversion ______.

equals the cost of the replacement property minus deferred gain on the involuntary conversion

If transferors of property to a corporation in exchange for corporate stock does not satisfy the control requirement, ______.

gain or loss realized on the exchange must be recognized

Under the substituted basis rule for qualifying property received in a nontaxable exchange, ______.

gain realized on the exchange is deferred until the qualifying property is disposed of in a taxable transaction

The loss of property through involuntary conversion ______.

may result in a gain if insurance or condemnation proceeds exceed the basis of the property

A taxpayer engaging in a wash sale of securities ______.

must defer recognition of realized losses

Nontaxable exchange provisions ______.

provide significant value to taxpayers with realized gains on exchange transactions

In an otherwise qualifying nontaxable exchange, boot ______.

received can trigger gain recognition, but not loss recognition

A wash sale of securities ______.

requires a reacquisition of substantially the same securities within 30 days before or 30 days after the sale

After the Tax Cuts and Jobs Act of 2017, a contribution of property to a corporation by a governmental entity, without issuance of corporate shares ______.

results in taxable income to the corporation

A corporation that issues its own stock in exchange for property in a transaction that does not qualify for nontaxable exchange treatment ______.

takes a cost basis in the property acquired

The inclusion of boot in an otherwise nontaxable exchange causes ___.

the party receiving the boot to recognize a portion of realized gain equal to the FMV of the boot